If you are an investor who has made an investment mistake, you are not alone. Even the Oracle of Omaha himself, Warren Buffett, has made purchases that he regrets in one way or another. In an attempt to build additional income, a retirement account, send our children to college, or perhaps finance a vacation home, almost all investors have one thing in common: they want to make more money than a paycheck will generate. .
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But sometimes what drives us toward financial success can throw us off the intended path. I’ve highlighted three potential investment mistakes to avoid to help keep investors on the right track and generate stronger returns while optimizing efficiency, spending less time and money to earn more.
1. Underestimating the advantages of a 401(k)
When people use a 401(k) to invest for retirement, they don’t pay taxes on the funds they contribute in the year they make those contributions. That’s a great benefit, but it may not be the biggest. Even better, many employers that offer 401(k)s to their employees will provide matching funds when you contribute to your account, up to a certain point. The average cap on the matching fund is 3.5% of your annual salary. But some investors make the mistake of not taking full advantage of their employers’ matching contribution, particularly if your company’s matching contribution limit is higher than average.
According to a national compensation survey from the Bureau of Labor Statistics, 56% of employers offer a 401(k) plan. Among them, 49% do not offer matching funds. Among employers that do, 41% offer an annual 401(k) matching contribution of up to 6% of total salary. But 10% of all employers offer a match of 6% or more. Therefore, if you work for a company with a matching contribution, you must at least contribute enough to earn the maximum employer match.
So for those looking for a new job, how a prospective employer handles their 401(k) plan can be an important factor to consider. As a reference, Southwest Airlines offers up to a 9.3% match, while Duke University offers a 13.2% match for faculty and staff with salaries between $72,000 and $305,000, regardless of employee contribution. So if your employer matches 6% and you’re only contributing 1% of your salary, it’s worth increasing your contribution.
One caveat is that once you put money into a 401(k), you’re not supposed to withdraw it until you’re at least 59 1/2 years old, at which point you’ll be taxed. And if you pick it up early, you will be charged an additional 10% penalty.
2. Putting dividends to work too late
Dividend stocks offer another way to let someone else’s money make more money for you. Of course, you must invest to own shares. But once you do, you’ll start getting regular payments that can help cover your bills. Or, you can reinvest those dividends to increase the number of shares you own. But some investors don’t recognize the important role dividends can play in building a long-term portfolio.
For example, Coca Cola (New York Stock Exchange: KO) is one of the elite dividend kings, with a track record of increasing its annual dividend for 60 years in a row. At today’s stock price, your current annual dividend of $1.76 yields about 2.7%.
A $10,000 investment in Coca-Cola stock would give you approximately 154 shares at the time of this writing. That’s $271 per year in passive income, or the equivalent of four additional shares if you reinvested those payments. Do that over 30 years at a 3.7% annualized average dividend growth rate, plus a 6.5% average share price gain, based on the last 10 years, since the last split. of stock, and the result would be a total of about $19,000 in dividend income by 2052.
There are many companies that offer dividends, and many with higher returns than Coca-Cola. It is also fair to say that the younger an investor is, the more risk they can afford to take on stocks that could have greater potential for non-dividend share price growth. But this is just one example where using dividends earlier in life can help build passive income while protecting an investor from the uncertainties that come with market volatility and an investment portfolio. aggressive.
3. Get distracted by the shiny object
This can be one of the most difficult mistakes to overcome. Dedicated investors spend a good deal of time and money building what they believe to be solid portfolios. They will make changes to their holdings as new recommendations emerge, or when news and earnings reports require them to adjust their investment thesis.
But sometimes, sudden hype can start to boil around a new company, product, or market – think cryptocurrency, the cannabis sector, or meme stocks. These shiny objects can distract investors, dangling in front of them the exciting prospect of becoming an overnight millionaire.
That’s not to say that legal or crypto marijuana isn’t worth it for long-term investors; these were just examples. But when the hype dies down, if bold projections don’t come true, it’s easy to find yourself with a declining or worthless investment. In the meantime, if you sold shares in your portfolio to finance this new investment, you could also have missed out on the profits of more reliable companies.
This is where the risk/reward needs to be carefully weighed. Getting distracted by the shiny object can be rewarding if you get there early and take off, two big ifs. But when you have an accumulated portfolio and you’re close to retirement age or sending a child to college, you need to protect that investment from the pitfalls of volatility. That is the time not to be distracted by the shiny object.
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Jeff Little has positions at Coca-Cola. The Motley Fool recommends Southwest Airlines. The Motley Fool has a disclosure policy.